Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Grupo Aeroportuario del Centro Norte OMA fourth quarter 2011 earnings results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is also being recorded today, Friday, February 24th of 2011.

I would now like to turn the conference over to our host for today, Mr. Jose Luis Guerrero. Please go ahead, sir.

Good morning. Welcome to OMA's fourth quarter 2011 earnings conference call. My name is Jose Luis Guerrero, OMA's Chief Financial Officer.

Joining us this morning, Porfirio Gonzalez, OMA's CEO, and Israel Magana, our Investor Relations Officer. I will start with an overview of OMA's fourth quarter results. Porfirio Gonzalez will then discuss our outlook for 2012. We will be pleased to answer your questions.

Unless otherwise indicated, all numbers refer to the fourth-quarter results and their comparison versus the fourth quarter of 2010.

OMA generated solid fourth-quarter results, and the overall environment is the most positive since the start of the recession in 2008. Passenger traffic is rebounding. We are executing our plans to grow both our aeronautical and non-aeronautical revenue at rates well above the rate of traffic growth, and we are sustaining our adjusted EBITDA margins.

Passenger traffic volume increased 7.1% in the fourth quarter, with domestic traffic increasing 9.4%. Other airline operators have mostly filled in the gap in the route network caused by Mexicana suspension of operations in August 2010. This is the third quarter in a row of increasing passenger traffic and the strongest quarterly growth in the traffic since the first quarter of 2008.

The airlines are continuing to execute their expansion plans. These [other routes have lines in place] by the end of the quarter and plans to receive more in 2012, as it is adding international routes from Monterrey to Chicago, San Antonio, Miami, and Orlando. Aeromexico added 1 Embraer 190 jet and 2 Boeing 737-800s to its fleet in quarter, with a total of 11 planes to its fleet during 2011, and will continue to increase capacity. Volaris reached its 34th plane and recently opened an international route from Zacatecas to Chicago. Additionally, Copa Airline started their route to Monterrey-Panama this past December.

The sum of aeronautical and non-aeronautical revenues grew 29%. Aeronautical revenues increased 32.7%. This reflects a growth in traffic and the increase in passenger tariffs. We made the first increase in April and a second increase in October under our 2011-2015 maximum rate agreement. Year over year, passenger charges increased an average of 20.6%, while tariffs for aeronautical services increased in line with inflation.

Non-aeronautical revenue increased 18.3% and reflects 3 separate business initiatives. First is our proud initiative to increase and improve the commercial offering in our airports. We continue to be very successful in leasing out commercial space, and the occupancy rate in the quarter was 92%.

The commercial line item that increased the most was advertising, up 84% as a result of our new non-traditional advertising, increasing our ad space and the renegotiation of advertising contracts. Also, car rentals were up 28%, and other commercial revenue was up 16%.

Second is the continued expansion of OMA Carga air freight logistics business. OMA Carga revenues grew 25% in the quarter due to a higher market share and [import] transactions.

Third is the continued growth of the NH Terminal 2 Hotel. Hotel revenues were up 9.6% year over year and the occupancy rate was 82.8%. This is the fifth quarter in a row with occupancy rates above 80%. Room rates were up 12%.

The fourth quarter of 2011 marked 15 quarters in a row were non-aeronautical revenue per passenger increased. Non-aeronautical revenue per passenger was MXN54.5, up 10.5%. Excluding the hotel, non-aeronautical revenue per passenger was MXN42, up 13.2%.

The mix of revenues, not including construction revenues, was 76% aeronautical and 24% non-aeronautical. When OMA became public in 2006, non-aeronautical revenues were only 19% of the total.

Cost and expenses increased principally because of the change in the policy for the maintenance provision for concession assets that we have discussed previously. In the fourth quarter of 2010, this provision was MXN16 million, and in the fourth quarter 2011 it rose to MXN41 million.

Under Mexican financial reporting standards, the maintenance expenditures that were required to preserve the value of concession properties were capitalized as part of airport concessions, and the effect on the income statement was seen through the depreciation charges to these concession assets. Under IFRS, these expenditures are expensed. Management established a provision based on estimates of the future expenditures that will be required to preserve the concession assets and actual maintenance [improvements] come from this provision. Our provision increased significantly because of the revised estimates of future maintenance expenditures.

Cost of services and G&A expenses, other than the maintenance provision and construction costs, increased 12.1% year over year, mainly due to higher electricity charges, a new security services contract and severance paid in the quarter.

The result is that our fourth quarter adjusted EBITDA reached MXN342 million, growing 50%. The adjusted EBITDA margin was 49.5%.

Because of the change to IFRS, we have made some changes in our adjusted EBITDA calculation. We are adjusting the traditional EBITDA calculation by taking out both construction revenue and construction costs, as well as a non-cash maintenance provision. The table in the earnings report provides the details on our adjusted EBITDA calculation. This calculation is comparable to the one that OMA previously provided and to the other companies that are still reporting under Mexican financial reporting standards.

Our comprehensive financial costs decreased in fourth quarter. The improvement is the result of the refinancing of our debt in July, which lowers our interest rate significantly. We had a tax credit in the fourth quarter from the provision of deferred single rate corporate tax, or IETU. While the effects of inflation are no longer recorded in the financial accounts, generating higher income tax, they are still included in the tax accounting, generating a credit for deferred IETU.

In addition, there is an increase in deferred income tax as a result of new financial projections, which are based on the master development plan and maximum rates for the period 2011-2015 approved by the SCT in December 2010. The projection of higher revenues required an increase in the deferred income tax provision.

Net income rose 25.5%. Higher operating income, lower financial costs and the tax rate all contributed to improvement.

In terms of CapEx, our investments in the fourth quarter totaled MXN233 million. The largest items were the expansion of Terminal C at Monterrey and the installation of closed-circuit TV monitors to enhance security in 10 of our airports and investment in the advanced baggage handling system and screening equipment.

CapEx has also included our diversification initiatives. The strip shopping mall in the Monterrey Airport on the main access highway is now operating. This building has a total leasable area of 2,200 square meters, and the first tenant moved in late last year. We are also starting the work on the first phase of the [Cargo City] in Monterrey. Our former office building, located next to the [flight] terminal, is being converted into leasable space for the major [air price of the Company].

Now, I would like to return the call over to our CEO, Porfirio Gonzalez, to discuss our outlook for 2012. Porfirio, please go ahead.

Thank you, Jose Luis, and good morning to everybody.

Our results for the fourth quarter and the full year 2011 demonstrate the consistent progress that OMA is making our major (inaudible).

First, we are increasing passenger traffic. The seven new international routes we opened in the fourth quarter are an important improvement in the connectivity of our airports, in particular the direct flight between Monterrey and Panama City. Panama is a route we have been working on for a couple of years and opens up business travel not just between those 2 cities, but between Monterrey and most of the major destinations of Central and South America.

Second, we're improving the quality of routes and services for passengers and other airport services and boosting commercial revenue, expanding the commercial of Terminal C in Monterrey. Increasing the alternatives of car rental and renegotiating our advertising agreements were all important achievements in 2011.

Third, we are moving forward with our diversification activities, as shown by the Monterrey terminal and the start of Cargo City.

The strong performance in each of these areas enabled OMA to meet or exceed our guidance for 2011. For 2012, we expect to stay on this growth projection and do even better.

We estimate that passenger traffic growth in 2012 will be between 2% and 4%, or in other words slightly above the 2011 growth rate.

The sum of aeronautical and non-aeronautical revenue is expected to increase between 8% and 12%. Aeronautical revenue will increase in line with traffic growth [some] price adjustment, including inflation. Non-aeronautical revenues are expected to increase at a somewhat [faster] rate.

Adjusted EBITDA margin is expected to be in the range of 48% to 51%.

Capital expenditures in 2012 under the master development plan will be approximately MXN700 million. We have [brought round this weight] with expansion and remodeling of the terminal in Culiacan, our second-busiest airport. We will be adding more than 3,000 square meters of space to the terminal, an increase of more than 25%. The additional space will enable us to improve the security checkpoints, which have been bottlenecked, will improve passenger flow through the terminals, increase seating in supporting areas, and add new stores and services. In addition, we are redoing the terminal's air conditioning system, [remodeling signs in the space] and remodeling all interior spaces.

The other major CapEx items for 2012 are rehabilitation of several runways and terminals in different airports of OMA, acquisition of the checked baggage screening equipment for Monterrey and design, installation and closed-circuit TV systems in 10 airports, including Acapulco, Juarez, Culiacan, Mazatlan, and Zihuatanejo, among others.

OMA is providing this outlook based on internal estimates. A number of factors will have a significant effect on estimates of traffic, revenue growth, adjusted EBITDA, and CapEx. These include changes in airline expansion plans, ticket prices and other factors affecting traffic volumes, the evolution of commercial and diversification projects, and economic conditions, among others. OMA can provide no assurance that the Company will achieve these results.

This concludes our prepared remarks, and thank you very much. Jose Luis?

Yes, operator, could you please open the call for questions?

Absolutely. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)

Luis Willard, GBM.

My first question, the tax charge you comment for October, can you provide us a little bit more color on the increment of the -- on the tariffs? And the second one is related -- if you could give us some updates on both the project for the cargo business and the commercial area in the Terminal 2 in Mexico City. Thank you.

Thank you, Luis. The domestic charges we saw an increase due to the increase in domestic passengers that rose 9%, and also because we had 3 increases in tariffs during 2011; one was in April, and one was in October. Going forward in 2012, we expect to have only adjustments for inflation in our tariffs; and therefore, the increase in domestic passenger charges will be directly linked to passenger growth and inflation.

Regarding the -- your second question regarding the cargo business and the investments in the commercial area of Terminal 2 in Mexico, the cargo business has been growing significantly in Monterrey. We're seeing growth in our business, and we have been opening new spaces to be able to do this. We have also installed new racks inside our cargo space to have -- to generate more areas of maneuvering cargo. We have the -- our former corporate offices that were right in front of the cargo area, we're now going to start to leasing them to our cargo clients. We have moved to the downtown Monterrey area into a closer space from the city.

In terms of the investments in Terminal 2 in Mexico City, we're talking to clients. 2010 and 2011 were difficult years to get clients interested in this opportunity in Terminal 2, so we're looking at different options in order to be able to develop this area.

(Operator Instructions)

[Arosto Ensigi], Morgan Stanley.

A question specifically related to your costs. The payroll line is increasing by about 36% year over year; the maintenance line as well. You mentioned new security services, etc., severance payments. How much of that increase was related to severance? And if so, is that -- can we consider that as a onetime and expect a pullback in that line?

Thank you, Arosto. That is correct. So, we have -- the large increase in the maintenance provision was due -- because in 2010 we had the maintenance provision for the previous 5-year plan. When the new 5-year plan was agreed with the SCT at the end of 2010, we had a new maintenance projection, and therefore we had to make a larger projection -- a larger liability in terms of our maintenance provision. So, this -- we should go forward every year with about MXN165 million in maintenance provision, so that's about MXN42 million -- MXN41 million every quarter of maintenance provision.

If we look at the increase in costs just from the aeronautical business, it was an increase in cost of about 12%, and that is driven mainly by the electricity charges and the cost of severance; therefore, in terms of electricity charges, we could see this going forward. We're looking at new alternatives to be able to reduce this cost, and we're continuing to add new technologies enabled to consume less electricity.

And then, on the payroll increase?

The payroll increase was principally because of security guards that need to be -- to have higher training. These are the guards that are checking passengers in the security checkpoints; and therefore, this training -- we have to pay them higher salaries.

But, I mean, specifically the payroll line, which went up 35.9% to a fourth quarter charge of -- I guess MXN129 million -- MXN130 million. Is that a new level or is that going to come back a bit because you also had -- you wrote severance payments in there?

So, under IFRS, you have to register when it actually occurred, and before it was provisioned. So, this is also a change because of adopting IFRS.

So, then, in that case, this MXN130 million for payroll is going to be a consistent -- that's the new level.

Yes, that should be around the new level.

(Operator Instructions)

Arosto Ensigi, Morgan Stanley.

One other question regarding the -- your guidance that you provided. Traffic for 2% to 4% growth for the year, I mean, does that include also a possibility of -- or are you already including that number -- potential new routes that could be opening, maybe a return of some airlines? How much -- or is that number just purely what's available today and your expectation for growth on that?

I mean, this number is -- we look at the growth of passenger traffic in OMA before the local carriers entered the market in 2006 and 2007. We used to grow about 1.5 times GDP growth, sometimes 1 times GDP growth. Then, there was the boom of the local airlines. We were growing higher than twice GDP growth. And then, during the crisis, we were below the fall of GDP. So, now we have -- we're looking at a recovery maybe 1 time growth of GDP. This doesn't include the potential return of any airline, either Mexicana or Aviacsa. So, any return of those airlines would be an upside to our projection. This growth does include the routes that we have -- that we are currently negotiating.

Rodolfo Ramos, Credit Suisse.

I just -- I wanted to see if you are looking at any opportunities to grow overseas airports according to the size that you're looking for. You mentioned before that the current airports, however, for auction were too large for your target. I was wondering if you're seeing any further opportunities currently. Thank you.

Thank you, Rodolfo. So, there are definitely opportunities coming up at this moment in South America and probably in the US as well. In regards to the South American opportunities, for example Brazil that we saw the results a couple of weeks ago, we see that was a very competitive environment in which, at the moment, we did not participate in that round. We are possibly considering participating in the second round or in the third round. We would be interested in airports that are between 1 and 10 million passengers, so these -- at the moment with this, it's an area we believe that Brazil is very competitive and that the returns would be very slim. We're looking at other opportunities at the moment in other countries in South America that we have signed non-disclosure agreements, so I -- the due diligence on some of them are in process, so I can no longer talk about them.

And in the US, are there any names that -- are there any specific opportunities that you're looking into?

So, the FAA recently announced that they were going to expand their program, their pilot program, in regards to the new airports opportunities, the concession opportunities. We believe that it would be -- we believe that the opportunities will come more from South America than from the US, also driven by the leverage that the airlines have in those airports and because they are -- some of them are currently run by the airlines, so that is also going to be a difficult scenario for any operator.

Ramon Obeso, HSBC.

Could you please repeat what are your expectations for aeronautical and non-aeronautical revenue growth for this year?

Thank you, Ramon. At the moment, we are not giving a specific guidance on the aeronautical and non-aeronautical revenues. We could see both of them close to a double-digit growth.

Rodrigo Echagaray, Scotia Capital.

First off, congratulations on the results, Jose Luis. I'm not sure I understand the increase in tariffs, as tariffs increased an average 10% on the past 2 quarters since the new MDP was determined. For this quarter, we saw a 20%-plus increase in the average tariff, so I'm not sure why the percentage change is so different. In other words, can we expect tariffs to only increase in line with inflation, as you were mentioning before, as of Q1 or starting in Q2 given that these increases started to take place in Q2 during last year? Thank you.

You're welcome, Rodrigo. In regards with the 10% increase in maximum tariffs, that is the global average increase in maximum tariffs. The composition of maximum tariffs is a mix of passengers traveled and also cargo units per airport. Therefore, the -- it is a different breakdown on what specific tariffs you can increase. At the end of the day, the amount of the maximum tariffs adds up to 10%, but it can be broken down into specific tariffs that can have smaller or larger increases.

In regards to whether we're going to see these effects of increasing tariffs in the following quarters, we will. As I mentioned in the call, we increased tariffs in April and in October of 2011, so the effects of those increases will be -- will also be seen in 2012; yet, the tariffs in 2012 should not increase only by -- but only by adjustments to inflation.

And management, it looks like there are no questions in the queue at this time. Please continue.

Thank you. On behalf of OMA, I want to thank you all for your participation in this call. Porfirio Gonzalez, Israel Magana and I are always available to answer your questions and hope to see you soon at our offices in Monterrey or in future events. Thank you and have a good day.

Ladies and gentlemen, this does conclude our conference for today. Thank you again for your participation, and you may now disconnect.